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Pay & Leave Pay Systems

Report To Congress: Cost of Administering the Federal Wage System

A Message From The Director of The Office of Personnel Management

I am pleased to present the Office of Personnel Management's (OPM's) report on the cost to the Government of administering the Federal Wage System (FWS). This report was prepared in response to House Report 107-152, which accompanied H.R. 2590 (enacted as Public Law 107-67, November 12, 2001). In that report, the House Committee on Appropriations directed OPM to report on the cost of administering the FWS, including the cost of data collection, the cost of analyzing FWS data and its transformation into FWS paylines and wage schedules, and the cost of operating the Federal Prevailing Rate Advisory Committee (FPRAC).

Our report estimates the total cost of administering the FWS to be about $5.8 million in FY 2001. Of this total, the Department of Defense spent about $5.4 million to collect FWS wage data and establish wage schedules for appropriated fund employees. OPM spent about $120,000 on FPRAC and about $275,000 on salaries and other costs associated with administering the FWS. We believe the FWS works well and is responsibly managed and that FWS wage surveys are conducted in a cost-effective manner.

The President has called for a Government that is citizen-centered, results-oriented, and market-based. The FWS meets those goals. Private sector participants in local FWS wage surveys contribute to setting blue-collar Federal pay rates at responsible levels. Blue-collar Federal employees participate at every level of the FWS pay determination process. The end result of the FWS pay determination process is a set of wage schedules that are based on local labor market rates and are responsive to changing market conditions. I am convinced that the FWS successfully accomplishes the purposes for which it was established.

The members of FPRAC have reviewed and contributed to this report. I look forward to continue receiving knowledgeable advice from FPRAC and other stakeholders about administering the FWS.

I want to thank the dedicated staff of OPM's Workforce Compensation and Performance Service for their hard work in drafting this report. The report can be found on the OPM Web site at Federal Wage System.

Kay Coles James DirectorMarch 2002

I. Introduction

House Report 107-152 accompanying H.R. 2590 (enacted as Public Law 107-67, November 12, 2001) directed the Office of Personnel Management (OPM) to report on the cost to the Government of administering the Federal Wage System (FWS). This report presents OPM's findings concerning the cost of administering the FWS, including the cost of data collection, the cost of analyzing FWS data and its transformation into FWS paylines and wage schedules, and the cost of operating the Federal Prevailing Rate Advisory Committee (FPRAC). As requested by the House Committee on Appropriations, the report also includes the number of FWS employees in each Federal agency.

II. Background

Blue-collar Federal workers have been paid according to local prevailing private sector rates since the Civil War. Until 1965, each Federal agency had authority to determine local prevailing rates and establish wage area boundaries for its employees. As a consequence, blue-collar Federal workers at the same grade level in the same city working for different agencies received different rates. In 1965, President Lyndon B. Johnson addressed this inequity by ordering Federal agencies to coordinate their wage-setting activities under the leadership of the Civil Service Commission. The Commission established the National Wage Policy Committee, made up of the heads of the major employing agencies and the heads of the major Federal employee unions, to seek advice on how to combine separate agency pay systems into a Coordinated Federal Wage System (CFWS). The CFWS eliminated inequities and unnecessarily overlapping administrative structures from the blue-collar pay determination process.

In 1972, President Richard M. Nixon signed Public Law 92-392, which established the current Federal Wage System (FWS). The FWS incorporated most of the existing administrative policies of the CFWS. Since 1972, the Commission and its successor agency, OPM, have been responsible for overseeing the administration of the FWS. The FWS now covers about 206,000 trade, craft, and laboring employees who are paid from appropriated funds. These employees are located in 132 separate appropriated fund wage areas throughout the country and in overseas areas. This report does not contain any separately identifiable costs of administering pay for blue-collar employees of nonappropriated fund (NAF) instrumentalities because the NAF pay system is self-sustaining. Although FPRAC provides OPM with recommendations on administering the NAF portion of the FWS, the Committee is funded entirely through appropriated funds.

The Department of Defense (DOD) conducts FWS wage surveys and establishes pay rates for all regular FWS wage schedules and most special FWS wage schedules. One of the key statutory principles underlying the FWS is that employee pay rates are to be maintained in line with prevailing levels of pay for comparable levels of work in the private sector within a local wage area. To carry out this statutory principle, DOD conducts annual wage surveys in each of the 132 separate wage areas to collect wage data from private sector establishments. DOD then establishes a local FWS wage schedule in each wage area based on the survey data.

Pay adjustments for General Schedule (GS) and FWS employees differ because separate laws and regulations authorize different surveys, methodologies, and occupational coverage. GS locality payments, which are authorized under the Federal Employees Pay Comparability Act of 1990, are based on a comparison of Federal and non-Federal pay. Each January, the law provides for GS employees to receive a general across-the-board increase based on the 12-month increase (if any) in the Employment Cost Index (less 0.5 percentage points), plus an increase, if warranted, based on the local cost of labor for white-collar occupations in each of 32 GS locality pay areas. The Government's policy for white-collar Federal employees, established in 5 U.S.C. 5301, is that Federal pay rates should be comparable to non-Federal pay rates for the same levels of work within the same local pay area. FWS employees were specifically excluded from the GS locality pay system because they were already paid under a separate, preexisting prevailing rate system that reflects private-sector practices for setting pay at different levels of work for trades, craft, and laboring occupations. Thus, the Federal Government's compensation practices mirror the private sector's general practice of establishing separate and distinct pay structures and pay adjustment mechanisms for white-collar and blue-collar employees.

Since fiscal year 1979, successive Congresses have limited the maximum pay increases agencies may grant to FWS employees. FWS wage schedule adjustments may not exceed 4.8 percent at any given grade level in FY 2002. The 4.8 percent limitation is not a guarantee; the actual pay increase at any given grade for FWS employees may be less than 4.8 percent if FWS wage surveys show that a lesser amount will allow FWS pay rates to reach parity with local private sector rates. OPM has authority to waive the pay limitation if necessary to ensure that Federal agencies are able to recruit and retain a qualified workforce. DOD adjusts FWS wage schedules at various times of the year to take into account variations in the timing of local private sector pay adjustments and to balance its survey workload responsibly.

III. Cost of Conducting Wage Surveys and Establishing Wage Schedules

The total cost of conducting wage surveys and establishing wage schedules was about $5.4 million in FY 2001. Of this amount, DOD's Wage and Salary Division spent about $4.5 million to collect FWS wage data and establish wage schedules for appropriated fund employees. We estimate the cost of operating local wage survey committees at about $925,000 in FY 2001. These costs are spread across the 132 appropriated fund wage areas and are not limited to DOD agencies. Some participants in local wage surveys are not DOD employees, but come from non-DOD agencies. Attachment 1 provides additional details about the cost of conducting wage surveys and establishing wage schedules. Attachment 2 contains OPM's detailed instructions to agencies on conducting FWS wage surveys, analyzing FWS data, and establishing FWS paylines and wage schedules. This information is provided for the purpose of documenting the procedures used to conduct FWS wage surveys.

The FWS operates under carefully regulated procedures OPM has developed cooperatively with Federal agencies and labor organizations over a 30-year period. These procedures are not static, but have been continually updated based on the advice of FPRAC, the statutory labor-management committee that advises the Director of OPM on the prevailing rate determination process.

One of the key statutory principles underlying the FWS is that pay rates are to be maintained in line with prevailing levels of pay for comparable levels of work in the private sector within a local wage area. OPM defines the boundaries of wage areas; prescribes the required industries to be surveyed, and the required job coverage for surveys; and designates a lead agency for each wage area. OPM selects a lead agency for each appropriated fund wage area based on the capability of an agency to successfully conduct a local FWS wage survey. DOD is the only employing agency with the capability to conduct local wage surveys for the FWS. The Department of Veterans Affairs and the National Aeronautics and Space Administration served as lead agencies in some wage areas until the 1990s. OPM has designated DOD as the lead agency for all FWS wage areas to improve the administration of the FWS and achieve economies of scale.

DOD conducts all appropriated fund FWS wage surveys and sets the rates of pay on each regular FWS wage schedule with the advice of a labor-management wage committee. The DOD Wage Committee is the national level labor-management committee that advises DOD on matters relating to the conduct of wage surveys and the establishment of wage schedules. DOD establishes a local wage survey committee in each wage area in which a labor organization represents, by exclusive recognition, wage employees subject to the wage schedules for which the survey is conducted. A labor-management local wage survey committee conducts local wage surveys in a wage area and reports survey findings to DOD. DOD includes industries in the manufacturing, transportation, communications, public utilities, and wholesale trade industries on all FWS wage surveys and may add additional survey industries if it appears the industries have a significant effect in determining local prevailing rates. Private-sector establishments included in local wage surveys must have a total of at least 50 employees, although OPM may make exceptions in certain wage areas with limited available wage data.

The law provides for two kinds of local wage surveys. A "full-scale" wage survey takes place at least every 2 years. During a full-scale wage survey, DOD creates a list of private-sector establishments within the scope of the wage survey in a wage area and sends teams of data collectors to collect wage data from those establishments that voluntarily agree to participate in wage surveys. A "wage-change" wage survey takes place each year DOD does not conduct a full-scale wage survey. During wage-change surveys, DOD updates the findings from the previous full-scale wage survey (usually by telephone) and issues a new wage schedule based on those findings. Wage-change surveys are usually far less expensive to conduct than full-scale wage surveys. In response to concerns about the cost of FWS surveys, we note that if DOD had the option of using a 3-year survey cycle instead of a 2-year survey cycle for full-scale surveys, DOD could significantly reduce the costs it incurs in conducting local wage surveys. This change to a 3-year cycle would require legislative action to change section 5343(b) of title 5, United States Code.

Prior to each full-scale survey, the local wage survey committee holds a public hearing to receive recommendations from interested parties concerning the area, industries, private industrial establishments, and jobs to be covered in the wage survey. DOD develops survey specifications after taking into consideration the reports and recommendations received from the local wage survey committee and, if applicable, the DOD Wage Committee. The survey specifications include -

the area to be surveyed;

the industries to be surveyed;

the standard minimum size of establishments to be surveyed;

the establishments to be surveyed with certainty; and

the survey jobs.

A list of establishments to be surveyed is prepared by using statistical sampling techniques according to specifications DOD establishes.

The local wage survey committee, after consulting with the lead agency, determines the number of data collectors needed for a wage survey based on the estimated number and location of establishments to be surveyed. Wage data for appropriated fund surveys are collected by teams consisting of one local FWS employee and one Federal employee who represents agency management. The data collectors are selected and appointed by their employing agency. In selecting and appointing data collectors, agencies must balance the requirements of active employee involvement in the wage survey process with the prudent management of available financial and human resources.

Data collection for a full-scale wage survey is accomplished by personal visits to each establishment on a survey list. Data collectors submit the data they collect to the local wage survey committee with their recommendations about the use of the data. The local wage survey committee reviews all establishment information and survey job data collected in the wage survey for completeness and accuracy and forwards all of the data collected to the lead agency with a report of its recommendations concerning the use of the data. The lead agency reviews all wage survey data forwarded by the local wage survey committee to ensure the survey was conducted within the prescribed procedures and specifications.

After consulting with the DOD Wage Committee, DOD selects a payline and constructs a wage schedule after considering all of the information, analysis, and recommendations made available to it. FWS wage schedules have a single effective date for all employees in a wage area.

IV. Cost of the Federal Prevailing Rate Advisory Committee

OPM spent about $217,000 on administrative expenses for FPRAC in FY 2000. For FY 2001, the committee was without a Chairman and did not meet for most of the year. The cost of operating the committee in FY 2001 was about $120,000. Because FPRAC has had a Chairman since December 2001, we expect FPRAC's FY 2002 administrative expenses to be similar to its FY 2000 expenses. These costs include the salary and benefits of the Chairman and an administrative assistant and other miscellaneous administrative costs. The FY 2001 figure also includes the salary and benefit costs for attendance at FPRAC meetings of the four non-OPM agency representatives. Although FPRAC has ten members, these members receive no additional compensation for their service on the Committee.

V. Federal Wage System Employment

The FWS now covers about 206,000 appropriated fund prevailing rate employees. These employees are located in 132 separate wage areas throughout the country and in overseas areas. The FWS also covers about 45,000 nonappropriated fund (NAF) prevailing rate employees working in 123 separate wage areas and overseas. Because the NAF pay system is self-sustaining, we have not included information about employees covered by the NAF pay system in this report. However, the vast majority of NAF employees are in activities on military installations.

Although FWS wage schedules apply by law only to Federal employees, the schedules have other uses. Contractors that perform work for the Federal Government and which are covered by the McNamara-O'Hara Service Contract Act must pay their workers at least the prevailing wage level for the geographic area of employment. The Department of Labor (DOL) conducts prevailing rate studies to determine pay under the Service Contract Act. However, when DOL is unable to find adequate data to determine prevailing rates for contract employees, it uses FWS wage schedules to determine contractor pay rates. State and local governments also use the FWS pay schedules when setting pay. DOD provides statistical summaries of local wage survey data to private sector survey participants, which may sometimes choose to use this information as one tool among many to set pay for their own employees. Several foreign embassies and consulates use FWS wage schedules for establishing their pay levels in the U.S.

In response to the request of the House Committee on Appropriations, Attachment 3 lists the number of FWS employees employed by each Federal agency as of September 2001.

VI. Conclusion

We estimate the total cost of administering the Federal Wage System to be about $5.8 million in FY 2001. (This amount includes about $275,000 for OPM's costs, exclusive of FPRAC.) Of this total, about $925,000 represents costs attributable to the salaries of Federal employees who participated in local wage surveys. The survey work performed by these employees represents only a relatively small proportion of the duties they performed throughout the year. Overall, we believe the prevailing rate determination process works well and is responsibly managed and that surveys are conducted in a cost-effective manner.